sigma 4/2016 - Mutual insurance in the 21st century: back to the future?

Over the past few years, premiums written by mutual insurers have outpaced the growth of the wider insurance market. The sector has undergone a modest recovery but also faces new challenges.

Between 2007 and 2014, premiums written by member-owned mutual insurers grew by 27.5% in nominal terms, compared with 15.8% growth for the insurance industry as a whole. This took mutuals’ share of the world insurance market to just over 26% in 2014 from around 24% in 2007. However, that share was still well short of previous highs. For example, in the life sector, the share of global premiums of life mutuals was 23% in 2014, down from around 66% in the late 1980s and early 1990s before a wave of demutualisations in a number of countries. Furthermore, mutual insurers face a number of challenges that could constrain sector growth in the future.

Emerging challenges …
The most obvious challenges are new risk-based regulatory capital standards and the introduction of tougher corporate governance arrangements, designed to boost the resilience of individual insurers and curb excessive risk taking. The requirements could have an undesired effect of putting some mutuals, especially smaller ones with a narrow regional or business line focus, at a competitive disadvantage. It will be easier for larger and better-diversified insurers to manage the additional operational and funding costs associated with compliance.

Digital technology could present the biggest game changer for mutuals and the wider insurance market. It is disrupting all aspects of the insurance value chain and fundamentally re-configuring the competitive environment in which all insurers operate. Existing mutual insurers recognise the need to innovate and some are in the vanguard of change, promoting digitalisation in all areas of their operations. Some of the smaller, more traditional mutuals, however, remain in the digital slow lane, and run the risk of being left behind if they do not upgrade their business practices. This is especially true given the growing development of peer-to-peer (P2P) insurance platforms, which enable individuals to share risks among themselves in much the same way that affinity-based mutual insurers do.

… but also potential opportunities
Governments and regulators recognize the potential unintended consequences of additional regulation. Notably, they emphasise proportionality in new prudential and governance regimes. Moreover, they also appear open to other measures to foster mutuality. For example, governments in a few countries have introduced explicit legislation to allow mutuals to issue equity-like capital instruments, such as "certificats mutualistes" in France. Alongside more effective use of reinsurance and alternative risk transfer mechanisms such as insurance-linked securities, these initiatives provide mutuals with increased financial flexibility to cope with unexpected losses, grow their business and compete with other types of insurer.

At the same time, advances in digital technology could yet be a boon for the mutual model. Exploiting social media and smart analytics to better understand the needs and preferences of customers should be a natural fit for mutuals, whose raison d'être is to serve the needs and maintain the trust of their members. Furthermore, technology-led moves towards full risk-based could price some people out of conventional insurance. Here mutuals, unencumbered by the need to provide returns to external shareholders, could play an increasingly important role in keeping insurance premiums affordable and some risks insurable.

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